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Amundi Sees Sustainable Rally in Emerging Markets - in Late 2019

(Bloomberg) -- A sustained rebound in emerging markets may be almost a year away, and investors should be wary of any bounce after U.S. mid-term elections, according to Europe’s largest asset manager.

Ultimately, it will take an American economic slowdown and the end of Federal Reserve monetary tightening for the asset class to shine again, said Yerlan Syzdykov, global head of emerging markets. In the meantime, Syzdykov sees opportunities in dollar-denominated bonds from developing nations, a strategy that offers some yield premiums without exposure to exchange-rate and inflation pressures.

Investors might be tempted to dive back into emerging markets as soon as December, if President Donald Trump pivots from his current protectionist phase toward a “more pro-business” approach on trade issues, according to Syzdykov. He anticipates that the presidential campaign will entail appealing to sponsors and donors that oppose an escalation of the trade war.

“That probably would be the moment when the Chinese, as I understand, propose this mega-deal to the United States to settle their differences with regards to the trade war,” said London-based Syzdykov, who oversees 39.4 billion euros ($46 billion) in emerging-market bonds and stocks. “We may have a bit of a December rally, but it’s not going to be sustainable and justifiable from the perspective of the fundamental picture.”

Dollar Factor

The best time to be long emerging markets will be the second half of 2019, when the U.S. economy starts to decelerate as the tax-cut boost wears off, the Fed keeps a lid on interest-rate hikes and the dollar loses steam, Syzdykov said in an interview in Singapore Wednesday.

That suggests further pain for emerging-market stocks that have tumbled into a bear market, with the MSCI Emerging Markets Index down more than 25 percent from a high in January. On the currency front, one gauge is down 5.5 percent this year.

Among his specific picks and avoids:

Dollar bonds of Andean countries such as Chile and Peru, which benefit from a “very solid policy-making framework” and “fairly stable” economics and politics

Debt linked to oil, such as Nigerian bonds, though Amundi is neutral on Russia because of that country’s tensions with the U.S.

Turkey’s dollar bonds, now that the policy mix there has started to change. Amundi has been adding to its holdings in the past month

Exposure to Argentina is being reduced. “Valuation-wise it still is attractive, but I think the fear in Argentina is there would be a political change given the pressures on the economy,” he said